The UK government changed the tax position of buy-to-let investment, leaving many landlords with property portfolios that created tax liabilities rather than profits. To overcome this problem, savvy investors turn to the option of a Special Purpose Vehicle (SPV) limited company. An SPV is commonly a subsidiary a parent company creates to isolate financial risk.
Its distinct legal and financial status as a separate company makes its tax obligations secure. Moreover, even if the parent company suffers a financial disaster, such as going bankrupt, an SPV continues to operate unhindered. However, for property investors, its main charm or attraction comes from the tax optimization and asset protection benefits.
If you are keen on learning a detailed analysis of an SPV, visit our guide, What Is an SPV (Special Purpose Vehicle) for Property Investment?
Accountingfirms has specifically created the post to provide investors with comprehensive details on how to finance property purchases through an SPV. It illustrates the crucial steps in funding property acquisitions by using an SPV.
Hence, let’s get started.
How to finance property purchases through an SPV?
Before outlining each step involved in learning how to finance property purchases through an SPV, let’s have a glance at the overall process.
To own the property, an investor essentially sets up an SPV, which is noteworthily a separate/ distinct limited company. Then, the SPV secures a mortgage to purchase the property. With the loan secured against the asset, the investor(s) can fund the SPV through shared ownership.
It allows them to leverage potential rental income. Lastly, their personal liability from the property investment remains isolated or immune since they are “buying” the property through an SPV limited company rather than as an individual directly.
Important steps involved:
Following are the key steps on how to finance property purchases through an SPV for readers to dig into the process:
Creating the SPV:
Firstly, an investor registers the SPV with the structure of a limited liability company (LLC). This limited company is specifically designed to hold the property investment.
To further explain, to set up an SPV to finance property purchase, the investor must register their company with regulatory bodies like Companies House. It involves specific documentation and adherence to legal standards.
The registration includes essential steps like submission of annual accounts and declaring ownership proportions to Companies House. In addition, required and necessary documents include Articles of Association and Memorandum of Association that forthrightly define the company’s business.
Funding the SPV for property purchase:
Once the SPV is registered, the investor should establish the funding structure. For instance, they can inject capital into the SPV limited company via shared subscriptions. The investors could raise this capital by contributing personal funds or obtaining capital from outside investors.
To be more specific, outside investors include family members, friends, or institutional lenders keen on availing real estate opportunities.
Notably, it is imperative to clearly outline the investment terms, such as share distribution, expected returns and exit strategies. Finally, with proper legal compliance and accurate documentation, an investor can safeguard the interests of all the stakeholders involved and ensure transparency.
Securing a mortgage:
After securing the capital, the investor seeks financing or funds through a commercial mortgage. Evidently, the SPV will act as the borrower here with the property put up as collateral for the mortgage. Now, the investor approaches lenders and submits an application.
This application contains the details about the property, SPV’s financial projections and the objectives it aims to accomplish. Further elaborating, putting up the property as collateral signifies that the lender will determine the loan (mortgage) amount by assessing the property’s value.
Purchasing the property:
After securing the mortgage, the SPV stands eligible to purchase the desired property. For greater clarity, the funds used to finalise the transaction (property purchase) come from the mortgage, coupled with the additional capital raised. Likewise, the title of the property is registered in the SPV’s name, since it affirms the limited liability benefits an investor can claim under the SPV’s structure.
At this stage , it is crucial to consult with real estate professionals and legal advisors to resolve any complications that may arise and ensure compliance with all regulations.
Managing rental income:
Unarguably, the SPV will start yielding rental income after the acquisition of the property. All the rental income is collected and submitted to the SPV’s accounts. The primary purposes of this rental income include covering up the ongoing mortgage payments (i.e., principal and interest) and generating profits for the investors involved.
Admittedly, a seasoned accountant can craft a well-structured and customised plan for you to understand how to finance property purchases through an SPV. Similarly, seeking professional assistance can ensure that the yielded rental income effectively services the mortgage payments and allows you to reinvest and fund the profits for property purchases in the future.
Therefore, Accountingfirms will be delighted to help you in this regard.
Concluding remarks:
In essence, financing property purchases through an SPV warrants meticulous planning, securing capital and mortgage, and effectively managing the income generated from rental properties.
This approach provides not only extra asset protection but also tax benefits that could significantly boost your profits. Beyond that, in this day and age, when every penny counts, it is essential that investors reach out to a professional accountant to understand the nitty-gritty of how to finance property purchases through an SPV to capitalise on all the benefits accompanying an SPV.
With Accountingfirms, financing property purchases under an SPV would become an easy sail for you. The accountants listed on our website will help you determine the most workable and cost-effective solutions for property investments.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.